Shadow Credit Dominance and Monetary Transmission Failure in Nigeria: From Constraint to Exploitation

– By Chinedu Okoye 

Introduction and Summary:

This paper dicuses the over extended tightening of monetary policy in Nigeria, giving the exorbitant rates in the non-bank financial sector. From the inception of demand management policies, monetary policy tools has undergone a series of regulatory changes, cyclical downturns, etc, however this has also been accompanied by intense periods of success on an annualized average.

This has not been unique to Nigeria but a general occurrence amongst all central banks. Now, whilst the availability of credit has increased, as new Fintech Apps (non-bank) lenders exploited a gap, seen as the regulations which banks abide by, is somewhat restrictive, and some of these bank are as a result concentrating on individuals and corporates and with lesser risk profile.

As a result the Fintech based credit companies (or shadow banks), absent regulations took the initative and considerable risk, to fill this gap and also capture the unbanked. The Fintech Loan Apps sector grew over 20% in the time period (2023-2024), and based on ZE constructed Lending Index basing the number of loans issued at 100, at 2020.

We found, that Fintech lending has been steadily increasing but began increasing at an exponential rate from 2023, and has continued the rapif pace of growth, confirming the ZE fears of a liquidity tightnening beyond necessary and also counterintuitive. This is cause ultra high rates, and a steady depletion of real income/earnings creates stability, liquidity and profitabilty concerns concerns at the ZE Camp. 

The increased [Non-bank] lending to the private sector in itself could be a positive, however the unchecked exorbitant abnormally profitable [money] pricing. This is the major concern for Zero Equilibrium analysts as we would explain below, and show that Nigeria’s prolonged monetary tightening did not only reduce liquidity within the banking system but also shifted credit demand into a largely unregulated non-bank sector, where exorbitant lending rates amplify the intended contractionary effects of policy.

This created opportunities for arbitrary money pricing, which we deem not only unsustainable but unsustainable for the Nigerian Economy as we argue for closer monitoring and provision of incentives for compliance with new regulatory requirements around interest rate burdens and spreads.

The Non-bank Lending Exploitation:

There is a broad incomparable difference between Commercial Banks loan rates and that of Fintech Loan Apps, as whilst the average prime lending rate for five banks we sampled (GTCO, Zenith, Access, Stanbic and Ecobank), is approximately 26% per annum (p.a.), however the average annualized fohr for Fintech Loan Companies is in high triple digit, ranging from 105% to as high as 400% p.a.

However on the surface, the 15% interest rate offer for one month, or the 6.5% interest rate weekly rate looks attractive, but for commercial banks, it's lower when the annual average rate is divided by the amount of months in a year (12) is about 2.25%. 

The recent monetary tightnening experienced over 18 of the last 24 months, to combat inflation by the Cardoso led CBN has essentially reduced liquidity in the system. With high Cash Reserve Ratio at 45% down 500 basis points from Q2 2025, a high liquidity ratio, and a 27% monetary policy rate - the benchmark for rates on public and private credit but still subject to demand - the central bank essentially squeezed liquidity in the process of providing Naira stability and eliminating the exchange rate factors affecting prices.

The MPR guides retail loan rates which is usually set rates above the monetary policy rate, on the basis of competition, and compliance, and increases in MPR ia aimed at increasing rates to cool off spending, and quell the Naira flight as interest rate increases increases the effective real rate on risk free yields.

However with the Naira depreciation and the rise in inflation depletes real wages, which only increased the dependency on debt, as individuals, households and businesses scout for capital. This increased demand to supplement income, for either production or consumption activities naturally placed the balance of power in favor of relatively unregulated and unrestricted Non-bank lenders..

Double Liquidity Squeeze: An Excessive Arbitrary Induced Tightening.

Banks on average already face regulatory requirements, demanding they hold a certain percent of liquid assets, themto hold Government securities. (Eg FGN Bonds, and Treasury yields.

Nigerian banks can earn 15-17% on NTBs, a risk free asset, and this creates a dilemma amongst lenders, between pursuing riskier assets with exponential gains, or stability. The result so far in Nigeria's economic history has been growth safety and value mix.l, by these Banks, to varying degrees.

The regulations and capital structure of commercial banks force them into the rational decision of concentrating on large-scale and/or proven businesses with a high level of credit rating. A high CRR and CPI excecbates this as issue as liquidty conditions are tightened and real wages shrunk.

As a result the banks and other FIs face a dilemma between higher returns from risky investment. And safer low yielding quality corporate debt, government securities offering risk free yields. And hence the rationing and of loanable funds from a low money multiplier(or high CRR).

Below is data from the CBN, showing the. Rate if growth of credit to the private sector by banks from the year 2021-2025.

Year     Private Sector Credit            yoy%∆

2021      N35trn                                   +15.9%

2022      N42 trn                                  +20%

2023      N67trn                                   +59.3%

2024      N74 trn                                  +10%

2025      N75 trn                                  +2.8%

From the above, it is clear that, though the total amount continued to increase, ther is a clear slowdown in the rate of change from Q4 2023 to Q42025. The early 2020's to 2022 was characterized by a policy-driven extreme monetary expansion. 2023's spike is only nominal as an FX devaluation adjustment shows a lesser number than the nominal figure reported. The slowdown began in2024, after all adjustments had been made and the monetary policy rate, and cash reserve ratio requirements, in addition to that is also government borrowing crowding out private sector credit, and risk repricing.

CREDIT TO PRIVATE SECTOR (BANKS)

2021  ████ +15.9%

2022  █████. +20%

2023  ██████████. +59.3%

2024  ███████████ +10%

2025  ████████████ +2.80%

[% ∆ in credit to the private sector between the years 2020-2025]

Lesser regulatory requirements, essentially gives Fintechs an untapped market. As banking Lending constraints, from the nature of their capital structure to regulatory requirements. Hence the exponential rise of Fintech lending in the last 5 years

Banking Lending Behavior and The Forced Shift to non-bank Lenders:

The unique risks that face small businesses justifies this banking behaviour as it is reflective of an unconducive business environment that make overhead costs a variable and rising, erasing the bottom line of businesses, whilst real wage depletion creates headwinds on the demand side.

The cost of this is that whilst businesses that are listed, or private helped large corporations can leverage on their volume, sizefinanvial capacity, liquidity, cash flow and, market share and competitive edge. To obtain cheaper rates.

This beahvoir not only increase the cost for smaller business already married with profitabilty risks, higher costscosts and, revenue challenges, but also scarce. Prompting the private sector to non-bank lenders. Given that the financial markets are less sophisticated and efficient.

FINTECH LENDING:

2021  ██ +60%

2022  ███ +50%

2023  █████  +58%

2024  ███████ +37%

2025  ██████████████ +70%

(Fintech Lending Index % growth 2020-2025)

The structural factors promoting this range from infrastructure deficits to Inflationary expectations, exchange rate risks, and insolvency risks from businesses closing shop. This makes the banking credit - [SME] Industrial link weak, or broken.

Because Non-bank lenders are not subject to the stringent reserve requirements as banks are given that private investor credit are the funds being deployed and not risk averse savers (deposits). This urgency skew the bargaining power in favor of the lender.

Now, whilst it is rational to charge considerably higher than banks, (which are protected by the CBN and mandated to macroprudential policies in the recent tightening) and warrants the non-bank the non-bank FIs offering higher rate,.the rates which could range from 20% - as high as 300%, risks further detoriarion in the economy as traditional savers earn meager sums on  commercial banks, and below benchmark rates on alternative investment/savings and loans companies, but pay larger interest on loans.

Hence, anti inflationary policies e.g. the 1325bps between Q42023 and Q2 2025increase in the Banks benchmarks rate (MPR) and tighter liquidity from a high CRR, not only increase costs, and loan los defaults, tighten Liquidity tinteo layers; first for commercial banks, and then on non-bank lending. 

The monetary tightening went beyond restrict liquidity, stemming Naira flight and attracting FPIs, to unintentionally re-routing it into a more expensive, less regulated channel, which ended up amplifying the squeeze.

The Economic Effect of Unethical Interest Rate Conditioning:

The balance of power shifts to the nonback lenders as well and bank lenders, but the former to a higher degree as it is instant, more aggressive and loosely regulated if at all. Add the depletion in real wages in Nigeria to the average of household and business non-bank credit costs, and you get a stagflation, sustained high inflation, or sluggish growth and a low to negative economic complexity. So as the CBN tightens, and raises or keep benchmark rates higher, and when excess issuances price in a double digit nominal yield, it leads to two layers of Liquidity squeeze

.

First, in the form of banking credit. And the rationing explained above which is as a result of high CRR, and opportunity costs, and,

Secondly, by increasing the leverage of non-bank lenders.

This dampens income/earnings - or depletion, as rates reduces future income. Forcing the market to non-bank lenders who then charge double to quadruple the rate of mainstem larger commercial banks, essentially tightening monetary conditions beyond what was expected, intended and necessary.

As a result this hastens the move or acts as a catalyst for a move from hedge to speculative and from speculative to.Ponzi financing postures. Due to the effects on depleted incomes, for households and producers alike as it is impossible for output to grow without an accompanying rise in prices of production goods and the deeper this eats into income, the more dependent on debt the firm is.

Though a recession may not necessarily be in the cards or imminent for the Nigerian economy, sluggish growth and stagflation is an expected outcome.

Broader Economic Risks:

The above discusses the possible effects on the private sector, and the government. But more disturbing is the fragility of the financial sector embedded in or accompanied with high cost of credit, and persistent inflation.

This amongst other factors is the biggest economic risks as investments keep being deterred, or businesses take hits to increased to their respective bottom lines, unemployment and/or underemployment can ensure.

Since supply responds to aggregate demand, and depletion in real income levels affect this demand, the ultra high interest rate offer by these Non-bank lenders, on a real and nominal basis, stifles spending of both consumers and producers alike, as debt validation weakens with huge obligations from undue, and inefficient money pricing.

 

An economy with a sound monetary system, stable currency and a healthy fiscal balance (which is relative to GDP, Productivity and Government Revenue), can survive or quickly rise out of an economic contraction from it's key industries, but it is a lot more difficult when the monetary system is not strong or comprehensive and exhaustively sufficient to support the financial sector in a crash.

As a result we argue that the relevant authorities need a modified framework that better captries and regulates the non-bank financial sector, offering some form of collaborative support in exchange for strict compliance with ethical money pricing. 

Zero Equilibrium® Economics Remarks, Recommendations Policy  Propositions:

To maintain stability, credibility and fight consumer exploitation, it is imperative that the Nigerian federal governmen, through it's federal consumer protection commission (FCCPC) and Central Bank, create and instill policies that cap lending rates as well as enforcing the fulfilment of debt obligations.

Lesser than the current ultra high rates would reduce the debt burden, ease bottom line pressures, and reduce the non-bank loan delinquency rate.

With the FCCPC focusing on consumer protection and preventing exploitation, and the central bank, providing stability and asset quality improvement. The non-bank financial segment benefits more in.the long-term, as until loans are paid off, they only exist on books as mere numbers.